RESEA RC H PR OJEC T

REPORT ON

“Analytical Study Of Foreign Direct Investment in India”

Project Report Submitted towards

Partial fulfillment of requirements for obtaining the degree of

Master of Business Administration

Session 2009-10

SUBMITTED BY SUBMITTED TO:

Deepak kumar Gautam Miss GarimaChaudhary

0826370012 Faculty Guide

V.S.B

VIDYA SCHOOL OF BUSINESS

MEERUT

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CERTIF ICA TE

This is to certify that Deepak Kumar Gautam student of M.B.A IV SEM V.S.B. Meerut has under gone

a research project on “Analytical Study Of Foreign Direct Investment in India ”And submitted

a report based on the same as a mandatory requirement for obtaining the degree of Master of Business

Administration from Uttar Pradesh Technical University, Lucknow.

Date:

Director of V.S.B.

Dr . J.R Bhatti

Meerut

2

CERTIF ICA TE

This is to certify that Deepak Kumar Gautam student of M.B.A IVsem, V.S.B. Meerut has under gone a

research project on “Analytical Study Of Foreign Direct Investment in India ”And submitted

a report based on the same as a mandatory requirement for obtaining the degree of Master of Business

Administration from Uttar Pradesh Technical University, Lucknow

Miss Garima Chaudhray

Faculty guide

Meerut

Date:

3

ACNOWLEDGEMEN T

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ACKNOWLEDGEMEN T

I extend my sincere thanks to all those who helped me in the completion of this project. Without their

undying help and guidance, this project would not be what it is. I specially extend my heartfelt thanks to

my Faculty guide M i s s G ar im a Chaudhray for helping me at every step, and guiding me in every way

possible. This project would not have been successful without her help and continuous guidance

throughout. A special note of thanks also goes out to the people from various fields for giving me their

precious time and helping me with this project. I also extend my appreciation towards my family who

encouraged me and were by my side whenever I needed them.

Deepak Kumar Gautam

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INDEX

IN DE X

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TOPIC PAGE NO.

Introduction

Meaning

Definition

History

Objective of the study

Research methodology

Conclusion

Recommendations & suggestions

Limitations of research

Bibliography

Annexure

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Introduction

Introduction and overview

What is Foreign Direct Investment ?

Meaning:

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These three letters stand for foreign direct investment. The simplest explanation of FDI would be a direct

investment by a corporation in a commercial venture in another country. A key to separating this action

from involvement in other ventures in a foreign country is that the business enterprise operates completely

outside the economy of the corporation’s home country. The investing corporation must control 10 percent

or more of the voting power of the new venture.

According to history the United States was the leader in the FDI activity dating back as far as the end of

World War II. Businesses from other nations have taken up the flag of FDI, including many who were not

in a financial position to do so just a few years ago.

The practice has grown significantly in the last couple of decades, to the point that FDI has generated

quite a bit of opposition from groups such as labor unions. These organizations have expressed concern

that investing at such a level in another country eliminates jobs. Legislation was introduced in the early

1970s that would have put an end to the tax incentives of FDI. But members of the Nixon administration,

Congress and business interests rallied to make sure that this attack on their expansion plans was not

successful. One key to understanding FDI is to get a mental picture of the global scale of corporations able

to make such investment. A carefully planned FDI can provide a huge new market for the company,

perhaps introducing products and services to an area where they have never been available. Not only that,

but such an investment may also be more profitable if construction costs and labor costs are less in the

host country.

The definition of FDI originally meant that the investing corporation gained a significant number of shares

(10 percent or more) of the new venture. In recent years, however, companies have been able to make a

foreign direct investment that is actually long-term management control as opposed to direct investment in

buildings and equipment.

FDI growth has been a key factor in the “international” nature of business that many are familiar with in

the 21st century. This growth has been facilitated by changes in regulations both in the originating country

and in the country where the new installation is to be built. Corporations from some of the countries that

lead the world’s economy have found fertile soil for FDI in nations where commercial development was

limited, if it existed at all. The dollars invested in such developing-country projects increased 40 times

over in less than 30 years. The financial strength of the investing corporations has sometimes meant

failure for smaller competitors in the target country. One of the reasons is that foreign direct investment in

buildings and equipment still accounts for a vast majority of FDI activity. Corporations from the

originating country gain a significant financial foothold in the host country. Even with this factor, host

countries may welcome FDI because of the positive impact it has on the smaller economy.

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Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories,

mines and land. Increasing foreign investment can be used as one measure of growing economic

globalization. Figure below shows net inflows of foreign direct investment as a percentage of gross

domestic product (GDP). The largest flows of foreign investment occur between the industrialized

countries ( N or t h A m er i c a , W e s t ern E uro p e and J apan).But flows to non-industrialized countries are

increasing sharply. Foreign direct investment (FDI) refers to long term participation by country A into

country B.

It usually involves participation in m anag e m en t , j o i n t - ven t ur e , t ran s fer of t e chno l ogy and expe r ti s e . There

are two types of FDI: inward foreign direct i nve st m ent and outward foreign direct investment, resulting in

a net FDI inflow (positive or negative) .Foreign direct investment reflects the objective of obtaining a

lasting interest by a resident entity in one economy (‘‘direct investor’’) in an entity resident in an

economy other than that of the investor (‘‘direct investment enterprise’’).The lasting interest implies

the existence of a long-term relationship between the direct investor and the enterprise and a

significant degree of influence on the management of the enterprise. Direct investment involves both

the initial transaction between the two entities and all subsequent capital transactions between them

and among affiliated enterprises, both incorporated and unincorporated.

• Foreign Direct Investment – when a firm invests directly in production or other facilities, over

which it has effective control, in a foreign country.

• Manufacturing FDI requires the establishment of production facilities.

• Service FDI requires building service facilities or an investment foothold via capital contributions

or building office facilities.

• Foreign subsidiaries – overseas units or entities.

• Host country – the country in which a foreign subsidiary operates.

• Flow of FDI – the amount of FDI undertaken over a given time.

• Stock of FDI – total accumulated value of foreign-owned assets.

• Outflows/Inflows of FDI – the flow of FDI out of or into a country.

• Foreign Portfolio Investment – the investment by individuals, firms, or public bodies in foreign

financial instruments.

• Stocks, bonds, other forms of debt.

• Differs from FDI, which is the investment in physical assets.

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Portfolio theory – the behavior of individuals or firms administering large amounts of financial

assets.

Product Life-Cycle Theory

• Ray Vernon asserted that product moves to lower income countries as products move through their

product life cycle.

• The FDI impact is similar: FDI flows to developed countries for innovation, and from developed

countries as products evolve from being innovative to being mass-produced.

The Eclectic Paradigm

• Distinguishes between:

– Structural market failure – external condition that gives rise to monopoly advantages as a

result of entry barriers

– Transactional market failure – failure of intermediate product markets to transact goods

and services at a lower cost than internationalization

The Dynamic Capability Perspective

• A firm’s ability to diffuse, deploy, utilize and rebuild firm-specific resources for a competitive

advantage.

• Ownership specific resources or knowledge are necessary but not sufficient for international

investment or production success.

• It is necessary to effectively use and build dynamic capabilities for quantity and/or quality based

deployment that is transferable to the multinational environment.

• Firms develop centers of excellence to concentrate core competencies to the host environment.

Monopolistic Advantage Theory

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• An MNE has and/or creates monopolistic advantages that enable it to operate subsidiaries abroad

more profitably than local competitors.

• Monopolistic Advantage comes from:

– Superior knowledge – production technologies, managerial skills, industrial organization,

knowledge of product.

– Economies of scale – through horizontal or vertical FDI

Internationalization Theory

• When external markets for supplies, production, or distribution fails to provide efficiency,

companies can invest FDI to create their own supply, production, or distribution streams.

• Advantages

– Avoid search and negotiating costs

– Avoid costs of moral hazard (hidden detrimental action by external partners)

– Avoid cost of violated contracts and litigation

– Capture economies of interdependent activities

– Avoid government intervention

– Control supplies

– Control market outlets

– Better apply cross-subsidization, predatory pricing and transfer pricing

Definition

Foreign direct investment is that investment, which is made to serve the business interests of

the i nve s t or i n a company, which is in a different nation distinct from the investor's country of origin.

A parent business enterprise and its foreign affiliate are the two sides of the FDI relationship. Together

they comprise an MNC.

The parent enterprise through its fore i gn d i rect i nve s tm ent effort seeks to exercise substantial control

over the foreign affiliate company. 'Control' as defined by the UN, is ownership of greater than or equal to

10% of ordinary shares or access to voting rights in an incorporated firm. For an unincorporated firm one

needs to consider an equivalent criterion. Ownership share amounting to less than that stated above is

termed as portfolio investment and is not categorized as FDI.

FDI stands for Foreign Direct Investment, a component of a country's national financial accounts. Foreign

direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It

does not include foreign investment into the stock markets. Foreign direct investment is thought to be

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more useful to a country than investments in the equity of its companies because equity investments are

potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and generally

useful whether things go well or badly.

FDI or Foreign Direct Investment is any form of investment that earns interest in enterprises which

function outside of the domestic territory of the i nve s t or . F D I s requ ire a business relationship between

a parent company and its foreign subsidiary. Foreign direct business relationships give rise to

multinational corporations. For an investment to be regarded as an FDI, the parent firm needs to have at

least 10% of the ordinary shares of its foreign affiliates. The investing firm may also qualify for an FDI

if it owns voting power in a business enterprise operating in a foreign country.

History

In the years after the Second World War global FDI was dominated by the United States, as much of the

world recovered from the destruction brought by the conflict. The US accounted for around three-quarters

of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to

become a truly global phenomenon, no longer the exclusive preserve of OECD countries.

FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of

global GDP. Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such

as factories, mines and land. Increasing foreign investment can be used as one measure of growing

economic globalization. Figure below shows net inflows of foreign direct investment as a percentage of

gross domestic product (GDP). The largest flows of foreign investment occur between the industrialized

countries ( N or t h A m er i c a , We s t ern E urope and J apan). But flows to non-industrialized countries are

increasing sharply.

Foreign Direct investor

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A foreign direct investor is an individual, an incorporated or unincorporated public or privateenterprise, a

government, a group of related individuals, or a group of related incorporated and/or unincorporated

enterprises which has a direct investment enterprise – that is, a subsidiary, associate or branch – operating

in a country other than the country or countries of residence of the foreign direct

investor or investors.

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Types of Foreign Direct Investment: An Overview

FDIs can be broadly classified into two types:

1 Outward FDIs

2 Inward FDIs

This classification is based on the types of restrictions imposed, and the various prerequisites required for

these investments.

Outward FDI: An outward-bound FDI is backed by the government against all types of associated risks. This

form of FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the

domestic i ndus t ri es and subsidies granted to the local firms stand in the way of outward FDIs, which are also

known as 'direct investments abroad.'

Inward FDIs: Different economic factors encourage inward FDIs. These include interest loans, t ax b r eak s ,

grants, subsidies, and the removal of restrictions and limitations. Factors detrimental to the growth of FDIs

include necessities of differential performance and limitations related with ownership patterns.

Other categorizations of FDI

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Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes place when a

multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the

output produced by the MNC.

Horizontal foreign direct investments happen when a multinational company carries out a similar business

operation in different nations.

• Horizontal FDI – the MNE enters a foreign country to produce the same products product at home.

• Conglomerate FDI – the MNE produces products not manufactured at home.

• Vertical FDI – the MNE produces intermediate goods either forward or backward in the supply

stream.

• Liability of foreignness – the costs of doing business abroad resulting in a competitive

disadvantage.

Methods of Foreign Direct Investments

The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy

through any of the following methods:

by incorporating a wholly owned s ub s i d i ary or co m pany

by acquiring shares in an associated enterprise

through a m erger or an acqu i s iti on of an unrelated enterprise

participating in an equity j o i nt ven t ure w ith another investor or enterprise

Foreign direct investment incentives may take the following forms:

low corpora t e t ax and i nco m e t ax ra tes

t ax ho li days

other types of tax concessions

preferential t ar i ffs

s pec i al econo mi c zones

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investment financial subsidies

s oft l oan or loan guaran t ees

free land or land subsidies

relocation & expatriation subsidies

job training & employment subsidies

i nfra s t ruc t ure s ubsidies

R&D support

derogation from regulations (usually for very large projects)

Entry Mode• The manner in which a firm chooses to enter a foreign market through FDI.

– International franchising

– Branches

– Contractual alliances

– Equity joint ventures

– Wholly foreign-owned subsidiaries

• Investment approaches:

– Greenfield investment (building a new facility)

– Cross-border mergers

– Cross-border acquisitions

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– Sharing existing facilities

Why is FDI important for any consideration of going global ?

The simple answer is that making a direct foreign investment allows companies to accomplish several

tasks:

1 .Avoiding foreign government pressure for local production.

2. Circumventing trade barriers, hidden and otherwise.

3. Making the move from domestic export sales to a locally-based national sales office.

4. Capability to increase total production capacity.

5.Opportunities for co-production, joint ventures with local partners, joint marketing arrangements,

licensing, etc;

A more complete response might address the issue of global business partnering in very general

terms. While it is nice that many business writers like the expression, “think globally, act locally”, this

often used cliché does not really mean very much to the average business executive in a small and

medium sized company. The phrase does have significant connotations for multinational

corporations. But for executives in SME’s, it is still just another buzzword. The simple explanation for

this is the difference in perspective between executives of multinational corporations and small and

medium sized companies. Multinational corporations are almost always concerned with worldwide

manufacturing capacity and proximity to major markets. Small and medium sized companies tend to be

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more concerned with selling their products in overseas markets. The advent of the Internet has ushered in

a new and very different mindset that tends to focus more on access issues. SME’s in particular are now

focusing on access to markets, access to expertise and most of all access to technology.

The Strategic Logic Behind FDI

• Resources seeking – looking for resources at a lower real cost.

• Market seeking – secure market share and sales growth in target foreign market.

• Efficiency seeking – seeks to establish efficient structure through useful factors, cultures,

policies, or markets.

• Strategic asset seeking – seeks to acquire assets in foreign firms that promote corporate long

term objectives.

Enhancing Efficiency from Location Advantages

• Location advantages - defined as the benefits arising from a host country’s comparative

advantages.- Better access to resources

– Lower real cost from operating in a host country

– Labor cost differentials

– Transportation costs, tariff and non-tariff barriers

– Governmental policies

Improving Performance from Structural Discrepancies

• Structural discrepancies are the differences in industry structure attributes between home and

host countries. Examples include areas where:

– Competition is less intense

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– Products are in different stages of their life cycle

– Market demand is unsaturated

– There are differences in market sophistication

Increasing Return from Ownership Advantages

• Ownership Advantages come from the application of proprietary tangible and intangible assets in

the host country.

– Reputation, brand image, distribution channels

– Technological expertise, organizational skills, experience

• Core competence – skills within the firm that competitors cannot easily imitate or match.

Ensuring Growth from Organizational Learning

• MNEs exposed to multiple stimuli, developing:

– Diversity capabilities

– Broader learning opportunities

• Exposed to:

– New markets

– New practices

– New ideas

– New cultures

– New competition

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The Impact of FDI on the Host Country

Employment

– Firms attempt to capitalize on abundant and inexpensive labor.

– Host countries seek to have firms develop labor skills and sophistication.

– Host countries often feel like “least desirable” jobs are transplanted from home countries.

– Home countries often face the loss of employment as jobs move.

FDI Impact on Domestic Enterprises

– Foreign invested companies are likely more productive than local competitors.

– The result is uneven competition in the short run, and competency building efforts in the

longer term.

– It is likely that FDI developed enterprises will gradually develop local supporting

industries, supplier relationships in the host country.

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Foreign Direct Investment in India

The economy of India is the third largest in the world as measured by purchasing power parity (PPP), with

a gross domestic product (GDP) of US $3.611 trillion. When measured in USD exchange-rate terms, it is

the tenth largest in the world, with a GDP of US $800.8 billion (2006). is the second fastest growing major

economy in the world, with a GDP growth rate of 8.9% at the end of the first quarter of 2006-2007.

However, India's huge population results in a per capita income of $3,300 at PPP and $714 at nominal.

The economy is diverse and encompasses agriculture, handicrafts, textile, manufacturing, and a multitude

of services. Although two-thirds of the Indian workforce still earn their livelihood directly or indirectly

through agriculture, services are a growing sector and are playing an increasingly important role of India's

economy. The advent of the digital age, and the large number of young and educated populace fluent in

English, is gradually transforming India as an important 'back office' destination for global companies for

the outsourcing of their customer services and technical support.

India is a major exporter of highly-skilled workers in software and financial services, and software

engineering. India followed a socialist-inspired approach for most of its independent history, with strict

government control over private sector participation, foreign trade, and foreign direct investment.

However, since the early 1990s, India has gradually opened up its markets through economic reforms by

reducing government controls on foreign trade and investment. The privatization of publicly owned

industries and the opening up of certain sectors to private and foreign interests has proceeded slowly amid

political debate. India faces a burgeoning population and the challenge of reducing economic and social

inequality. Poverty remains a serious problem, although it has declined significantly since independence,

mainly due to the green revolution and economic reforms. FDI up to 100% is allowed under the automatic

route in all activities/sectors except the following which will require approval of the Government:

Activities/items that require an Industrial License; Proposals in which the foreign collaborator has a

previous/existing venture/tie up in India

FDI in India includes, FDI inflows as well as FDI outflow from India. Also FDI foreign direct investment

and FII foreign institutional investors are a separate case study while preparing a report on FDI and

economic growth in India. FDI and FII in India have registered growth in terms of both FDI flows in India

and outflow from India. The FDI statistics and data are evident of the emergence of India as both a

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potential investment market and investing country. FDI has helped the Indian economy grow, and the

government continues to encourage more investments of this sort - but with $5.3 billion in FDI . India gets

less than 10% of the FDI of China. Foreign direct investment (FDI) in India has played an important role

in the development of the Indian economy. FDI in India has - in a lot of ways - enabled India to achieve a

certain degree of financial stability, growth and development. This money has allowed India to focus on

the areas that may have needed economic attention, and address the various problems that continue to

challenge the country. India has continually sought to attract FDI from the world’s major investors.

In 1998 and 1999, the Indian national government announced a number of reforms designed to encourage

FDI and present a favorable scenario for investors. FDI investments are permitted through financial

collaborations, through private equity or preferential allotments, by way of capital markets through Euro

issues, and in joint ventures. FDI is not permitted in the arms, nuclear, railway, coal & lignite or mining

industries. A number of projects have been announced in areas such as electricity generation, distribution

and transmission, as well as the development of roads and highways, with opportunities for foreign

investors. The Indian national government also provided permission to FDIs to provide up to 100% of the

financing required for the construction of bridges and tunnels, but with a limit on foreign equity of INR

1,500 crores, approximately $352.5m. Currently, FDI is allowed in financial services, including the

growing credit card business.

These services include the non-banking financial services sector. Foreign investors can buy up to 40% of

the equity in private banks, although there is condition that stipulates that these banks must be multilateral

financial organizations. Up to 45% of the shares of companies in the global mobile personal

communication by satellite services (GMPCSS) sector can also be purchased. By 2004, India received

$5.3 billion in FDI, big growth compared to previous years, but less than 10% of the $60.6 billion that

flowed into China. Why does India, with a stable democracy and a smoother approval process, lag so far

behind China in FDI amounts? Although the Chinese approval process is complex, it includes both

national and regional approval in the same process. Federal democracy is perversely an impediment for

India. Local authorities are not part of the approvals process and have their own rights, and this often leads

to projects getting bogged down in red tape and bureaucracy. India actually receives less than half the FDI

that the federal government approves.

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Investment Risks in India

Sovereign Risk

India is an effervescent parliamentary democracy since its political freedom from British rule more than

50 years ago. The country does not face any real threat of a serious revolutionary movement which might

lead to a collapse of state machinery. Sovereign risk in India is hence nil for both "foreign direct

investment" and "foreign portfolio investment." Many Industrial and Business houses have restrained

themselves from investing in the North-Eastern part of the country due to unstable conditions. Nonetheless

investing in these parts is lucrative due to the rich mineral reserves here and high level of literacy.

Kashmir on the northern tip is a militancy affected area and hence investment in the state of Kashmir are

restricted by law

Political Risk

India has enjoyed successive years of elected representative government at the Union as well as federal level. India suffered political instability for a few years in the sense there was no single party which won clear majority and hence it led to the formation of coalition governments. However, political stability has firmly returned since the general elections in 1999, with strong and healthy coalition governments emerging. Nonetheless, political instability did not change India's bright economic course though it delayed certain decisions relating to the economy. Economic liberalization which mostly interested foreign investors has been accepted as essential by all political parties including the Communist Party of India Though there are bleak chances of political instability in the future, even if such a situation arises the economic policy of India would hardly be affected.. Being a strong democratic nation the chances of an army coup or foreign dictatorship are minimal. Hence, political risk in India is practically absent.

Commercial Risk

Commercial risk exists in any business ventures of a country. Not each and every product or service is profitably accepted in the market. Hence it is advisable to study the demand / supply condition for a particular product or service before making any major investment. In India one can avail the facilities of a large number of market research firms in exchange for a professional fee to study the state of demand / supply for any product. As it is, entering the consumer market involves some kind of gamble and hence involves commercial risk

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Risk Due To Terrorism

In the recent past, India has witnessed several terrorist attacks on its soil which could have a negative impact on investor confidence. Not only business environment and return on investment, but also the overall security conditions in a nation have an effect on FDI's. Though some of the financial experts think otherwise. They believe the negative impact of terrorist attacks would be a short term phenomenon. In the long run, it is the micro and macro economic conditions of the Indian economy that would decide the flow of Foreign investment and in this regard India would continue to be a favorable investment destination.

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FDI Policy in India

Foreign Direct Investment Policy

FDI policy is reviewed on an ongoing basis and measures for its further liberalization are taken. Change in

sectoral policy/sectoral equity cap is notified from time to time through Press Notes by the Secretariat for

Industrial Assistance (SIA) in the Department of Industrial Policy announcement by SIA are subsequently

notified by RBI under FEMA. All Press Notes are available at the website of Department of Industrial

Policy & Promotion. FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior

approval in most of the sectors including the services sector under automatic route. FDI in

sectors/activities under automatic route does not require any prior approval either by the Government or

the RBI. The investors are required to notify the Regional office concerned of RBI of receipt of inward

remittances within 30 days of such receipt and will have to file the required documents with that office

within 30 days after issue of shares to foreign investors.

The Foreign direct investment scheme and strategy depends on the respective FDI norms and policies in

India. The FDI policy of India has imposed certain foreign direct investment regulations as per the FDI

theory of the Government of India . These include FDI limits in India for example:

○ Foreign direct investment in India in infrastructure development projects excluding arms and

ammunitions, atomic energy sector, ra il w ays s y s t em , extraction of coal and lignite and mi n i ng

i ndu s t ry is allowed upto 100% equity participation with the capping amount as Rs. 1500 crores.

○ FDI figures in equity contribution in the finance sector cannot exceed more than 40% in banking

services including credit card operations and in insurance sector only in joint ventures with local

insurance companies.

○ FDI limit of maximum 49% in t e l ecom i ndu s t ry especially in the GSM services

Government Approvals for Foreign Companies Doing Business in India

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Government Approvals for Foreign Companies Doing Business in India or Investment Routes for

Investing in India, Entry Strategies for Foreign Investors India's foreign trade policy has been

formulated with a view to invite and encourage FDI in India. The Reserve Bank of India has prescribed

the administrative and compliance aspects of FDI. A foreign company planning to set up business

operations in India has the following options:

Investment under automatic route; and

Investment through prior approval of Government.

Procedure under automatic route

FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by

the Government or RBI. The investors are only required to notify the Regional office concerned of RBI within 30

days of receipt of inward remittances and file the required documents with that office within 30 days of issue of

shares to foreign investors.

List of activities or items for which automatic route for foreign investment is not available, include the

following:

Banking

NBFC's Activities in Financial Services Sector

Civil Aviation

Petroleum Including Exploration/Refinery/Marketing

Housing & Real Estate Development Sector for Investment from Persons other

than NRIs/OCBs.

Venture Capital Fund and Venture Capital Company

Investing Companies in Infrastructure & Service Sector

Atomic Energy & Related Projects

Defense and Strategic Industries

Agriculture (Including Plantation)

Print Media

Broadcasting

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Postal Services

Procedure under Government approval

FDI in activities not covered under the automatic route, requires prior Government approval and are

considered by the Foreign Investment Promotion Board (FIPB). Approvals of composite proposals

involving foreign investment/foreign technical collaboration are also granted on the recommendations of

the FIPB. Application for all FDI cases, except Non-Resident Indian (NRI) investments and 100% Export

Oriented Units (EOUs), should be submitted to the FIPB Unit, Department of Economic Affairs (DEA),

Ministry of Finance. Application for NRI and 100% EOU cases should be presented to SIA in Department

of Industrial Policy & Promotion.

Investment by way of Share Acquisition

A foreign investing company is entitled to acquire the shares of an Indian company without obtaining any

prior permission of the FIPB subject to prescribed parameters/ guidelines. If the acquisition of shares

directly or indirectly results in the acquisition of a company listed on the stock exchange, it would require

the approval of the Security Exchange Board of India.

New investment by an existing collaborator in India

A foreign investor with an existing venture or collaboration (technical and financial) with an Indian

partner in particular field proposes to invest in another area, such type of additional investment is subject

to a prior approval from the FIPB, wherein both the parties are required to participate to demonstrate that

the new venture does not prejudice the old one.

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General Permission of RBI under FEMA

Indian companies having foreign investment approval through FIPB route do not require any further

clearance from RBI for receiving inward remittance and issue of shares to the foreign investors. The

companies are required to notify the concerned Regional office of the RBI of receipt of inward

remittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors or

NRIs.

Participation by International Financial Institutions

Equity participation by international financial institutions such as ADB, IFC, CDC, DEG, etc., in domestic

companies is permitted through automatic route, subject to SEBI/RBI regulations and sector specific cap

on FDI.

FDI In Small Scale Sector (SSI) Units

A small-scale unit cannot have more than 24 per cent equity in its paid up capital from any industrial

undertaking, either foreign or domestic.

If the equity from another company (including foreign equity) exceeds 24 per cent, even if the investment

in plant and machinery in the unit does not exceed Rs 10 million, the unit loses its small-scale status and

shall require an industrial license to manufacture items reserved for small-scale sector. See also FDI in

Small Scale Sector in India Further Liberalized

About foreign direct investment In India.

Is the process whereby residents of one country (the source country) acquire ownership of assets for the

purpose of controlling the production, distribution, and other activities of a firm in another country (the

host country). The international monetary fund’s balance of payment manual defines FDI as an investment

that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the

investor. The investors’ purpose being to have an effective voice in the management of the enterprise’.

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The united nations 1999 world investment report defines FDI as ‘an investment involving a long term

relationship and reflecting a lasting interest and control of a resident entity in one economy (foreign direct

investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct

investor ( FDI enterprise, affiliate enterprise or foreign affiliate).

I. Foreign direct investment: Indian scenario

FDI is permitted as under the following forms of investments –

· Through financial collaborations.

· Through joint ventures and technical collaborations.

· Through capital markets via Euro issues.

· Through private placements or preferential allotments.

Sector Specific Foreign Direct Investment in India

Hotel & Tourism: FDI in Hotel & Tourism sector in India100% FDI is permissible in the sector on the automatic route,

The term hotels include restaurants, beach resorts, and other tourist complexes providing accommodation

and/or catering and food facilities to tourists. Tourism related industry include travel agencies, tour

operating agencies and tourist transport operating agencies, units providing facilities for cultural,

30

adventure and wild life experience to tourists, surface, air and water transport facilities to tourists, leisure,

entertainment, amusement, sports, and health units for tourists and Convention/Seminar units and

organizations.

For foreign technology agreements, automatic approval is granted if

i. up to 3% of the capital cost of the project is proposed to be paid for technical and consultancy

services including fees for architects, design, supervision, etc.

ii. up to 3% of net turnover is payable for franchising and marketing/publicity support fee, and up to

10% of gross operating profit is payable for management fee, including incentive fee.

Private Sector Banking:

Non-Banking Financial Companies (NBFC)

49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from

time to time.

a. F D I / N RI / O CB i nve s tm en t s a ll o w ed i n t he fo ll o w i ng 19 N BFC ac ti v it i es s ha l l be as per l eve l s

i nd i ca t ed be l o w :

i. Merchant banking

ii. Underwriting

iii. Portfolio Management Services

iv. Investment Advisory Services

31

v. Financial Consultancy

vi. Stock Broking

vii. Asset Management

viii.Venture Capital

ix. Custodial Services

x. Factoring

xi. Credit Reference Agencies

xii. Credit rating Agencies

xiii.Leasing & Finance

xiv.Housing Finance

xv. Foreign Exchange Brokering

xvi.Credit card business

xvii.Money changing Business

xviii.Micro Credit

xix.Rural Credit

b. M i n im um Cap it a l i za t i on N or m s for fund ba s ed N BF C s :

i) For FDI up to 51% - US$ 0.5 million to be brought upfront

ii) For FDI above 51% and up to 75% - US $ 5 million to be brought upfront

iii) For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5 million to be

brought up front and the balance in 24 months

c. M i n im um cap it a li z a ti on nor m s for non-fund b a s ed ac ti v it i e s :

Minimum capitalization norm of US $ 0.5 million is applicable in respect of all permitted non-fund based

NBFCs with foreign investment.

d. Foreign investors can set up 100% operating subsidiaries without the condition to disinvest a

minimum of 25% of its equity to Indian entities, subject to bringing in US$ 50 million as at b) (iii) above

(without any restriction on number of operating subsidiaries without bringing in additional capital)

32

e. Joint Venture operating NBFC's that have 75% or less than 75% foreign investment will also be

allowed to set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also

complying with the applicable minimum capital inflow i.e. (b)(i) and (b)(ii) above.

f. FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the

Reserve Bank of India. RBI would issue appropriate guidelines in this regard.

Insurance Sector: FDI in Insurance sector in India

FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining license from

Insurance Regulatory & Development Authority (IRDA)

Telecommunication:

FDI in Telecommunication sector

i. In basic, cellular, value added services and global mobile personal communications by satellite,

FDI is limited to 49% subject to licensing and security requirements and adherence by the

companies (who are investing and the companies in which investment is being made) to the

license conditions for foreign equity cap and lock- in period for transfer and addition of equity and

other license provisions.

ii. ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted up to 74% with

FDI, beyond 49% requiring Government approval. These services would be subject to licensing

and security requirements.

iii. No equity cap is applicable to manufacturing activities.

iv. FDI up to 100% is allowed for the following activities in the telecom sector :

a. ISPs not providing gateways (both for satellite and submarine cables);

b. Infrastructure Providers providing dark fiber (IP Category 1);

c. Electronic Mail; and

d. Voice Mail

The above would be subject to the following conditions:

33

e. FDI up to 100% is allowed subject to the condition that such companies would divest 26%

of their equity in favor of Indian public in 5 years, if these companies are listed in other

parts of the world.

f. The above services would be subject to licensing and security requirements, wherever

required.

Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis.

Trading:

FDI in Trading Companies in India

Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities,

and the undertaking is an export house/trading house/super trading house/star trading house. However,

under the FIPB route:-

i. 100% FDI is permitted in case of trading companies for the following activities:

exports;

bulk imports with ex-port/ex-bonded warehouse sales;

cash and carry wholesale trading;

other import of goods or services provided at least 75% is for procurement and sale of goods and

services among the companies of the same group and not for third party use or onward

transfer/distribution/sales.

ii. The following kinds of trading are also permitted, subject to provisions of EXIM Policy:

a. Companies for providing after sales services (that is not trading per se)

b. Domestic trading of products of JVs is permitted at the wholesale level for such trading companies

who wish to market manufactured products on behalf of their joint ventures in which they have

equity participation in India.

c. Trading of hi-tech items/items requiring specialized after sales service

d. Trading of items for social sector

34

e. Trading of hi-tech, medical and diagnostic items.

f. Trading of items sourced from the small scale sector under which, based on technology provided

and laid down quality specifications, a company can market that item under its brand name.

g. Domestic sourcing of products for exports.

h. Test marketing of such items for which a company has approval for manufacture provided such

test marketing facility will be for a period of two years, and investment in setting up manufacturing

facilities commences simultaneously with test marketing

FDI up to 100% permitted for e-commerce activities subject to the condition that such companies would

divest 26% of their equity in favor of the Indian public in five years, if these companies are listed in other

parts of the world. Such companies would engage only in business to business (B2B) e-commerce and not

in retail trading.

Power:

FDI In Power Sector in India

Up to 100% FDI allowed in respect of projects relating to electricity generation, transmission and

distribution, other than atomic reactor power plants. There is no limit on the project cost and quantum of

foreign direct investment.

Drugs & Pharmaceuticals

FDI up to 100% is permitted on the automatic route for manufacture of drugs and pharmaceutical,

provided the activity does not attract compulsory licensing or involve use of recombinant DNA

technology, and specific cell / tissue targeted formulations.

FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced by

recombinant DNA technology, and specific cell / tissue targeted formulations will require prior

Government approval.

Roads, Highways, Ports and Harbors

FDI up to 100% under automatic route is permitted in projects for construction and maintenance of roads,

highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbors.

35

Pollution Control and Management

FDI up to 100% in both manufacture of pollution control equipment and consultancy for integration of

pollution control systems is permitted on the automatic route.

Call Centers in India / Call Centre’s in India

FDI up to 100% is allowed subject to certain conditions.

Business Process Outsourcing BPO in India

FDI up to 100% is allowed subject to certain conditions.

Special Facilities and Rules for NRI's and OCB's

NRI's and OCB's are allowed the following special facilities:

1. Direct investment in industry, trade, infrastructure etc.

2. Up to 100% equity with full repatriation facility for capital and dividends in the following sectors

i. 34 High Priority Industry Groups

ii. Export Trading Companies

iii. Hotels and Tourism-related Projects

iv. Hospitals, Diagnostic Centers

v. Shipping

vi. Deep Sea Fishing

vii. Oil Exploration

viii.Power

ix. Housing and Real Estate Development

x. Highways, Bridges and Ports

xi. Sick Industrial Units

xii. Industries Requiring Compulsory Licensing

36

3. Up to 40% Equity with full repatriation: New Issues of Existing Companies raising Capital

through Public Issue up to 40% of the new Capital Issue.

4. On non-repatriation basis: Up to 100% Equity in any Proprietary or Partnership engaged in

Industrial, Commercial or Trading Activity.

5. Portfolio Investment on repatriation basis: Up to 1% of the Paid up Value of the equity Capital or

Convertible Debentures of the Company by each NRI. Investment in Government Securities, Units

of UTI, National Plan/Saving Certificates.

6. On Non-Repatriation Basis: Acquisition of shares of an Indian Company, through a General Body

Resolution, up to 24% of the Paid Up Value of the Company.

7. Other Facilities: Income Tax is at a Flat Rate of 20% on Income arising from Shares or Debentures

of an Indian

37

India Further Opens Up Key Sectors for Foreign Investment

India has liberalized foreign investment regulations in key sectors, opening up commodity exchanges,

credit information services and aircraft maintenance operations. The foreign investment limit in Public

Sector Units (PSU) refineries has been raised from 26% to 49%.

An additional sweetener is that the mandatory disinvestment clause within five years has been done away

with. FDI in Civil aviation up to 74% will now be allowed through the automatic route for non-scheduled

and cargo airlines, as also for ground handling activities. 100% FDI in aircraft maintenance and repair

operations has also been allowed.

But the big one, allowing foreign airlines to pick up a stake in domestic carriers has been given a miss

again. India has decided to allow 26% FDI and 23% FII investments in commodity exchanges, subject to

the proviso that no single entity will hold more than 5% of the stake.

Sectors like credit information companies, industrial parks and construction and development projects

have also been opened up to more foreign investment. Also keeping India's civilian nuclear ambitions in

mind, India has also allowed 100% FDI in mining of titanium, a mineral which is abundant in India.

Sources say the government wants to send out a signal that it is not done with reforms yet. At the same

time, critics say contentious issues like FDI and multi-brand retail are out of the policy radar because of

political compulsions.

38

Sector-wise FDI Inflows ( From April 2000 to January 2010)

SECTORAMOUNT OF FDI

INFLOWS PERCENT OF TOTAL FDI INFLOWS (In terms of Rs)

In Rs MillionIn US$ Million

Services Sector 787420.81 18118.40 22.39

Computer Software &hardware 391109.74 8876.43 11.12

Telecommunications 275441.38 6215.55 7.83

Construction Activities 213595.12 5029.01 6.07

Automobile 146799.41 3310.23 4.17

Housing & Real estate 217936.02 5118.85 6.20

Power 137089.37 3129.66 3.90

Chemicals (Other thanFertilizers) 87008.07 1964.06 2.47

Ports 63290.50 1551.88 1.80

Metallurgical industries 109563.20 2612.85 3.11

Electrical Equipments 57379.63 1324.92 1.63

Cement & GypsumProducts 70781.19 1621.03 2.01

Petroleum & NaturalGas 94417.17 2244.17 2.68

Trading 62416.85 1480.94 1.77

Consultancy Services 48647.43 1112.92 1.38

Hotel and Tourism 52500.05 1217.50 1.49

Food ProcessingIndustries 34362.49 760.32 0.98

Electronics 33914.75 748.57 0.96

Misc. Mechanical & Engineering industries 28310.13 648.86 0.80

Information & Broadcasting (Incl. Print media)

52115.90 1194.20 1.48

39

Forbidden Territories:

Arms and ammunition

Atomic Energy

Coal and lignite

Rail Transport

Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold, diamonds, copper, zinc.

40

Foreign Investment through GDRs (Euro Issues) –

Indian companies are allowed to raise equity capital in the international market through the issue of

Global Depository Receipt (GDRs). GDR investments are treated as FDI and are designated in dollars and

are not subject to any ceilings on investment. An applicant company seeking Government's approval in

this regard should have consistent track record for good performance (financial or otherwise) for a

minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power

generation, telecommunication, petroleum exploration and refining, ports, airports and roads.

1. Clearance from FIPB –

There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in

the financial year. A company engaged in the manufacture of items covered under Annex-III of the New

Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or

which is implementing a project not contained in Annex-III, would need to obtain prior FIPB clearance

before seeking final approval from Ministry of Finance.

2. Use of GDRs –

The proceeds of the GDRs can be used for financing capital goods imports, capital expenditure including

domestic purchase/installation of plant, equipment and building and investment in software development,

prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in

India.

41

Foreign direct investments in India are approved through two

routes –

1. Automatic approval by RBI –

The Reserve Bank of India accords automatic approval within a period of two weeks (subject to

compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and 100% is

allowed depending on the category of industries and the sectoral caps applicable. The lists are

comprehensive and cover most industries of interest to foreign companies. Investments in high priority

industries or for trading companies primarily engaged in exporting are given almost automatic

approval by the RBI.

2. The FIPB Route – Processing of non-automatic approval cases –

FIPB stands for Foreign Investment Promotion Board which approves all other cases where the

parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is

liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign

investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity

of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to

the public.

42

iii. Analysis of sector specific policy for FDI

Sr. No. Sector/Activity FDI cap/Equity Entry/Route

1. Hotel & Tourism 100% Automatic

2. NBFC 49% Automatic

3. Insurance 26% Automatic

4. Telecommunication:

cellular, value added services

ISPs with gateways, radio-

paging

Electronic Mail & Voice Mail

49%

74%

100%

Automatic

Above 49% need Govt. licence

5. Trading companies:

primarily export activities

bulk imports, cash and carry

wholesale trading

51%

100%

Automatic

Automatic

6. Power(other than atomic reactor

power plants)100% Automatic

7. Drugs & Pharmaceuticals 100% Automatic

8. Roads, Highways, Ports and

Harbors

100% Automatic

9. Pollution Control and

Management

100% Automatic

10 Call Centers 100% Automatic

11. BPO 100% Automatic

12. For NRI's and OCB's:

i. 34 High Priority

43

Industry Groups

ii. Export Trading

Companies

iii. Hotels and

Tourism-related

Projects

iv. Hospitals,

Diagnostic

Centers

v. Shipping

vi. Deep Sea Fishing

vii. Oil Exploration

viii.Power

ix. Housing and Real

Estate

Development

x. Highways,

Bridges and Ports

xi. Sick Industrial

Units

xii. Industries

Requiring

Compulsory

Licensing

xiii.Industries

Reserved for

Small Scale

Sector

100% Automatic

13. Airports:

Greenfield projects 100% Automatic

44

Existing projects 100% Beyond 74% FIPB

14 Assets reconstruction company 49% FIPB

15. Cigars and cigarettes 100% FIPB

16. Courier services 100% FIPB

17. Investing companies in

infrastructure (other than

telecom sector)

49% FIPB

iii. Analysis of FDI inflow in India

From April 2000 to August 2009-10

(Amount US$ in Millions)

S.No Financial Year Total FDI Inflows % Growth Over Previous Year

1. 2000-01 4,029 ----

2. 2001-02 6,130 (+) 52

3. 2002-03 5,035 (-) 18

4. 2003-04 4,322 (-) 14

5. 2004-05 6,051 (+) 40

6. 2005-06 8,961 (+) 48

7. 2006-07 22,826 (+) 146

8. 2007-08 34,362 (+) 51

9. 2008-09 35,168 (+) 02

10. 2009-10 16,232 ----

45

46

iv. Analysis of share of top ten investing countries FDI equity in flows

From April 2000 to January 2010

(Amount in Millions)

Sr. No Country Amount of FDI Inflows % As To

Total FDI

Inflow

1. Mauritius 19,18,633.61 44.01

2. Singapore 3,80,142.56 8.72

3. U.S.A. 3,32,935.60 7.64

4. U.K. 2,40,974.98 5.53

5. Netherlands 1,78,047.76 4.08

6. Japan 1,50,129.05 3.44

7. Cyprus 1,32,448.04 3.04

8. Germany 1,12,242.06 2.57

9. France 61,686.39 1.42

10. U.A.E. 50,915.59 1.17

47

48

Mauritius

Mauritius invested Rs.19,18,633 million in India Up to the January 2010, equal to 44.01 percent of total

FDI inflows. Many companies based outside of India utilize Mauritian holding companies to take

advantage of the India- Mauritius Double Taxation Avoidance Agreement (DTAA). The DTAA allows

foreign firms to bypass Indian capital gains taxes, and may allow some India-based firms to avoid paying

certain taxes through a process known as “round tripping.”

The extent of round tripping by Indian companies through Mauritius is unknown. However, the Indian

government is concerned enough about this problem to have asked the government of Mauritius to set up a

joint monitoring mechanism to study these investment flows. The potential loss of tax revenue is of

particular concern to the Indian government. These are the sectors which attracting more FDI from

Mauritius Electrical equipment Gypsum and cement products Telecommunications Services sector that

includes both non- financial and financial Fuels.

Singapore

Singapore continues to be the single largest investor in India amongst the Singapore with FDI inflows into

Rs. 3,80,142 crores up to January 2010

Sector-wise distribution of FDI inflows received from Singapore the highest inflows have been in the

services sector (financial and non financial), which accounts for about 30% of FDI inflows from

Singapore. Petroleum and natural gas occupies the second place followed by computer software and

hardware, mining and construction.

U.S.A.

The United States is the third largest source of FDI in India (7.64 % of the total), valued at 732335 crore

in cumulative inflows up to January 2010. According to the Indian government, the top sectors attracting

FDI from the United States to India are fuel, telecommunications, electrical equipment, food processing,

and services. According to the available M&A data, the two top sectors attracting FDI inflows from the

United States are computer systems design and programming and manufacturing

49

U.K.

The United Kingdom is the fourth largest source of FDI in India (5.53 % of the total), valued at 2,40,974

crores in cumulative inflows up to January 2010

Over 17 UK companies under the aegis of the Nuclear Industry Association of UK have tied up with Ficci

to identify joint venture and FDI possibilities in the civil nuclear energy sector.

UK companies and policy makers the focus sectors for joint ventures, partnerships, and trade are non-

conventional energy, IT, precision engineering, medical equipment, infrastructure equipment, and creative

industries.

Netherlands

FDI from Netherlands to India has increased at a very fast pace over the last few years. Netherlands ranks

fifth among all the countries that make investments in India. The total flow of FDI from Netherlands to

India came to Rs. 1, 78,047 crores between 1991 and 2002. The total percentage of FDI from Netherlands

to India stood at 4.08% out of the total foreign direct investment in the country up to August 2009.

50

Following Various industries attracting FDI from Netherlands to India are:

Food processing industries

Telecommunications that includes services of cellular mobile, basic telephone, and radio paging

Horticulture

Electrical equipment that includes computer software and electronics

Service sector that includes non- financial and financial services

iii. Analysis of sectors attracting highest FDI equity inflows

From April 2000 to March 2010

(Amount in Millions)

Sr. No Country Amount of FDI

Inflows

% As To

Total FDI

Inflow

1. Service Sector

(Financial & Non Financial)

9,65,210.77 22.14

2. Computer Software & Hardware 4,13,419.03 9.48

3. Telecommunication 3,68,899.62 8.46

4. Housing & Real Estate 3,25,021.36 7.46

5. Construction Activities 2,65,492.96 6.09

6. Automobile Industry 1,90,172.22 4.36

7. Power 1,79,849.92 4.13

8. Metallurgical Industries 1,25,785.57 2.89

9. Petroleum & Natural Gas 1,11,957.00 2.57

10. Chemical 1,01,680.18 2.33

51

The sectors receiving the largest shares of total FDI inflows up to arch 2010 were the service

sector and computer software and hardware sector, each accounting for 22.14 and 9.48 percent

respectively. These were followed by the telecommunications, real estate, construction and

automobile sectors. The top sectors attracting FDI into India via M&A activity were

manufacturing; information; and professional, scientific, and technical services. These sectors

correspond closely with the sectors identified by the Indian government as attracting the largest

shares of FDI inflows overall.

The ASSOCHAM has revealed that FDI in Chemicals sector (other than fertilizers) registered maximum

growth of 227 per cent during April 2008 – March 2009 as compared to 11.71 per cent during the last

fiscal. The sector attracted USD 749 million FDI in FY ‘09 as compared to USD 229 million in FY ’08.

During the year 2009 government had raised the FDI limit in telecom sector from 49 per cent to 74 per,

which has contributed to the robust growth of FDI. The telecom sector registered a growth of 103 per cent

during fiscal 2008-09 as compared to previous fiscal. The sector attracted USD 2558 million FDI in FY

‘09 as compared to the USD 1261 million in FY ’08, acquired 9.37 per cent share in total FDI inflow.

India automobile sector has been able to record 70 per cent growth in foreign investment. The FDI inflow

in automobile sector has increased from USD 675 million to 1,152 million in FY ’09 over FY ’08. The

other sectors which registered growth in highest FDI inflow during April – March 2009 were housing &

real estate (28.55 per cent), computer software & hardware (18.94 per cent), construction activities

including road & highways (16.35 per cent) and power (1.86 per cent).

52

Foreign Investment Promotion Board

The FIPB (Foreign Investment Promotion Board) is a government body that offers a single window

clearance for proposals on foreign direct investment in the country that are not allowed access through the

automatic route. Consisting of Senior Secretaries drawn from different ministries with Secretary

,Economic Affairs in the chair, this high powered body discusses and examines proposals for foreign

investment in the country for restricted sectors ( as laid out in the Press notes and extant foreign

investment policy) on a regular basis. Currently proposals for investment beyond 600 crores require the

concurrence of the CCEA (Cabinet Committee on Economic Affairs). The threshold limit is likely to be

raised to 1200 crore soon.The Board thus plays an important role in the administration and

implementation of the Government’s FDI policy. In circumstances where there is ambiguity or a conflict

of interpretation, the FIPB has stepped in to provide solutions. Through its fast track working it has

established its reputation as a body that does not unreasonably delay and is objective in its decision

making. It therefore has a strong record of actively encouraging the flow of FDI into the country. The

FIPB is assisted in this task by a FIPB Secretariat. The launch of e- filing facility is an important initiative

of the Secretariat to further the cause of enhanced accessibility and transparency .

Low Income Countries in Global FDI Race

The situation of foreign d i rect i nve s tm ent has been relatively good in the recent times with an increase of

38%. Normally, the foreign direct investment is made mostly into the extractive industries. However, now

the foreign direct i nve s t ors are also looking to pump money into the manufacturing industry that has

garnered 47% of the total foreign direct investment made in 1992. However, the situation has not been the

same in the countries with a middle income range.

53

The middle income countries have not received a steady inflow of foreign direct income coming their

way. The situation is comparatively better in the l ow i nco m e coun tries. They have had an

uninterrupted and continually increasing flow of fore i gn d i rect i nve s tm en t . It has been observed that the

various debt crises, as well as, other forms of economic crises have had less effect on these countries.

These countries had lesser amounts of commercial bank obligations, which again had been caused by the

absence of proper f i nanc i al m arke t s , as well as the fact that their economies were not open to foreign

direct investment. During the later phases of the decade of 70s the Asian countries started encouraging

foreign direct i nve s tm en t s i n their economies. China has received the most of the foreign direct

investment that was pumped into the countries

with low income. It accounted for as much as 86% of the total foreign direct investment made in the lower

income countries in with low income. It accounted for as much as 86% of the total foreign direct

investment made in the lower income countries in 1995.

The economic liberalization in China started in 1979. This led to an increase in the foreign direct

investment in China. In the years between 1982 and 1991 the average foreign direct investment in China

was US$ 2.5 billion. This average increased by seven times to become US$ 37.5 billion during 1995. A

significant amount of the foreign direct investment in China was provided in the industrial sector.

It was as much as 68%. Around 20% of the foreign direct investment of China was made in the real estate

sector. During the same period Nigeria had been the second best in terms of receiving foreign direct

investment. In the recent times India has risen to be the third major foreign direct investment destination

in the recent years. Foreign direct investment started in India in 1991 with the initiation of the economic

liberation.

There were more initiatives that enabled India to garner foreign direct investments worth US$ 2.9 billion

from 1991 to 1995. This was a significant increase from the previous twenty years when the total foreign

direct investment in India was US$1 billion. Most of the foreign direct investment made in India has been

in the infrastructural areas like telecommunications and power. In the manufacturing industry the

emphasis has been on petroleum refining, vehicles and petrochemicals Vietnam is a low income country,

which is supposed to have the same potential as China to generate foreign direct investment.

The foreign direct investment laws were introduced in Vietnam in 1987-88. This led to an increase in the

foreign direct investment made in the country. The amount stood at US$ 25 million in 1993 compared to

US$ 8 million in 1993. This amount increased by 3 times after the USA removed its economic sanctions

in 1994. The gas and pe t ro l eum i ndu s t r i es w ere the biggest beneficiaries of the foreign direct

54

investment. Bangladesh started receiving increasing foreign direct investment after 1991, when the

economic reforms took place in the country.

After 1991 it was possible for foreign companies to set up companies in Bangladesh without taking

permission beforehand. The foreign direct investment rose from US$ 11 million in 1994 to US$ 125

million in 1995. As per the available statistics the manufacturing industry, comprising of clothing and

textiles took up 20% of the total approved foreign direct investment. Food processing, chemicals and

electric machinery were also important in this regard. The increase in the foreign direct investment in

Ghana was remarkable as well. The figures increased from US$11.7 million, on an average, from 1986 to

1992 to US$ 201 million, on an average, from 1993 to 1995. This improvement was brought about by the

privatization of the Ashanti Goldfields.

FOREIGN INSTITUTIONAL INVESTMENT

I. Introduction to FII

Since 1990-91, the Government of India embarked on liberalization and economic reforms with a view of

bringing about rapid and substantial economic growth and move towards globalization of the economy. As

a part of the reforms process, the Government under its New Industrial Policy revamped its foreign

investment policy recognizing the growing importance of foreign direct investment as an instrument of

technology transfer, augmentation of foreign exchange reserves and globalization of the Indian economy.

55

Simultaneously, the Government, for the first time, permitted portfolio investments from abroad by

foreign institutional investors in the Indian capital market. The entry of FIIs seems to be a follow up of the

recommendation of the Narsimhan Committee Report on Financial System. While recommending their

entry, the Committee, however did not elaborate on the objectives of the suggested policy. The committee

only suggested that the capital market should be gradually opened up to foreign portfolio investments.

From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in all the securities

traded on the primary and secondary markets, including shares, debentures and warrants issued by

companies which were listed or were to be listed on the Stock Exchanges in India. While presenting the

Budget for 1992-93, the then Finance Minister Dr. Manmohan Singh had announced a proposal to allow

reputed foreign investors, such as Pension Funds etc., to invest in Indian capital market.

II. Market design in India for foreign institutional investors

Foreign Institutional Investors means an institution established or incorporated outside India which

proposes to make investment in India in securities. A Working Group for Streamlining of the Procedures

relating to FIIs, constituted in April, 2003, inter alia, recommended streamlining of SEBI registration

procedure, and suggested that dual approval process of SEBI and RBI be changed to a single approval

process of SEBI. This recommendation was implemented in December 2003.

Currently, entities eligible to invest under the FII route are as follows:

i) As FII: Overseas pension funds, mutual funds, investment trust, asset management company,

nominee company, bank, institutional portfolio manager, university funds, endowments,

foundations, charitable trusts, charitable societies, a trustee or power of attorney holder

incorporated or established outside India proposing to make proprietary investments or with no

single investor holding more than 10 per cent of the shares or units of the fund.

ii) As Sub-accounts: The sub account is generally the underlying fund on whose behalf the FII

invests. The following entities are eligible to be registered as sub-accounts, viz. partnership

firms, private company, public company, pension fund, investment trust, and individuals.

FIIs registered with SEBI fall under the following categories:

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a) Regular FIIs- those who are required to invest not less than 70 % of their investment in equity-related

instruments and 30 % in non-equity instruments.

b) 100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.

The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset management

companies, nominee companies and incorporated/institutional portfolio managers or their power of

attorney holders (providing discretionary and non-discretionary portfolio management services) to be

registered as FIIs. While the guidelines did not have a specific provision regarding clients, in the

application form the details of clients on whose behalf investments were being made were sought.

While granting registration to the FII, permission was also granted for making investments in the names of

such clients. Asset management companies/portfolio managers are basically in the business of managing

funds and investing them on behalf of their funds/clients. Hence, the intention of the guidelines was to

allow these categories of investors to invest funds in India on behalf of their 'clients'. These 'clients' later

came to be known as sub-accounts. The broad strategy consisted of having a wide variety of clients,

including individuals, intermediated through institutional investors, who would be registered as FIIs in

India. FIIs are eligible to purchase shares and convertible debentures issued by Indian companies under

the Portfolio Investment Scheme.

iii. Prohibitions on Investments:

FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. They are also not

allowed to invest in any company which is engaged or proposes to engage in the following activities:

1) Business of chit fund

2) Nidhi Company

3) Agricultural or plantation activities

4) Real estate business or construction of farm houses (real estate business does not include development

of townships, construction of residential/commercial premises, roads or bridges).

5) Trading in Transferable Development Rights (TDRs).

iv. Trends of Foreign Institutional Investments in India.

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Portfolio investments in India include investments in American Depository Receipts (ADRs)/ Global

Depository Receipts (GDRs), Foreign Institutional Investments and investments in offshore funds. Before

1992, only Non-Resident Indians (NRIs) and Overseas Corporate Bodies were allowed to undertake

portfolio investments in India. Thereafter, the Indian stock markets were opened up for direct participation

by FIIs. They were allowed to invest in all the securities traded on the primary and the secondary market

including the equity and other securities/instruments of companies listed/to be listed on stock exchanges in

India. It can be observed from the table below that India is one of the preferred investment destinations for

FIIs over the years. As of March 2009, there were 1609 FIIs registered with SEBI.

SEBI Registered FIIs in India

Year End of March

1992-93 0

1993-94 3

1994-95 156

1995-96 353

1996-97 439

1997-98 496

1998-99 450

1999-00 506

2000-01 527

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2001-02 490

2002-03 502

2003-04 540

2004-05 685

2005-06 882

2006-07 996

2007-08 1279

2008-09 1609

2009-10 1805

v. FII trend in India

Year Gross

Purchases

(a) (Rs. crore)

Gross Sales (b)

(Rs.crore)

Net

Investment (a-

b)

(Rs. crore)

% increase in

FII inflow

1992-93 17 4 13 -

1993-94 5593 466 5127 39338.46

1994-95 7631 2835 4796 -6.45

1995-96 9694 2752 6942 44.75

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1996-97 15554 6979 8575 23.52

1997-98 18695 12737 5958 -30.52

1998-99 16115 17699 1584 126.59

1999-00 56856 46734 10122 739.02

2000-01 74051 64116 9935 -1.85

2001-02 49920 41165 8755 -11.88

2002-03 47061 44373 2688 69.30

2003-04 144858 99094 45764 1602.53

2004-05 16953 171072 45881 0.26

2005-06 346978 305512 41466 -9.62

2006-07 520508 489667 30841 -25.62

2007-08 896686 844504 52182 69.20

2008-09 548876 594608 -45732 187.64

2009-10 - - - -

2010 data was not available

There may be many other factors on which a stock index may depend i.e. Government policies, budgets,

bullion market, inflation, economic and political condition of the country, FDI, Re./Dollar exchange rate

etc. But for my study I have selected only one independent variable i.e. FII and dependent variable is

indices of nifty.

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vi. Co – relation with Indices

Indices Co-relation with FII

Sensex 0.80

Bankex 0.18

Power 0.33

IT 0.13

Capital Goods 0.44

From the above table we can say that FII has a positive impact on all the indices which means that if FIIs

come in India then it is goods for the Indian economy. FIIs have more co-relation with Sensex so we can

say that they are mostly invest in big and reputed companies which are included in Sensex.

Power and Capital Goods sector have more co-relation with FII investment which shows more interest of

FIIs in those sectors.

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Difference Between FDI and FII

FDI v/s FII

Both FDI and FII is related to investment in a foreign country. FDI or Foreign Direct Investment is an

investment that a parent company makes in a foreign country. On the contrary, FII or Foreign Institutional

Investor is an investment made by an investor in the markets of a foreign nation.In FII, the companies

only need to get registered in the stock exchange to make investments. But FDI is quite different from it as

they invest in a foreign nation. The Foreign Institutional Investor is also known as hot money as the

investors have the liberty to sell it and take it back. But in Foreign Direct Investment, this is not possible.

In simple words, FII can enter the stock market easily and also withdraw from it easily. But F D I

cannot enter and exit that easily. This difference is what makes nations to choose FDI’s more than then

FIIs.

FDI is more preferred to the FII as they are considered to be the most beneficial kind of foreign

investment for the whole econo m y . specific enterprise. It aims to increase the enterprises capacity or

productivity or change its management control. In an FDI, the capital inflow is translated into additional

production. The FII investment flows only into the secondary market. It helps in increasing capital

availability in general rather than enhancing the capital of a specific enterprise.The Foreign Direct

Investment is considered to be more stable than Foreign Institutional Investor. FDI not only brings in

capital but also helps in good governance practices and better management skills and even technology

transfer. Though the Foreign Institutional Investor helps in promoting good governance and improving

62

accounting, it does not come out with any other benefits of the FDI. While the FDI flows into the primary

market, the FII flows into secondary market. While FIIs are short-term investments, the FDI’s are long

term.

1. FDI is an investment that a parent company makes in a foreign country. On the contrary,

FII is an investment made by an investor in the markets of a foreign nation.

2. FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit

easily.

3. Foreign Direct Investment targets a specific enterprise. The FII increasing capital availability in general.

4. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor

Objective of the study

63

Objective of the study:

➢ To know the flow of investment in India

➢ To know how can India Grow by Investment .

➢ To Examine the trends and patterns in the FDI across different sectors and from different countries

in India

➢ To know in which sector we can get more foreign currency in terms of investment in India

➢ To know which country s safe to invest .

➢ To know how much to invest in a developed country or in a developing.

➢ To know Which sector is good for investment .

➢ To know which country in investing in which country

➢ To know the reason for investment in India

➢ Influence of FII on movement of Indian stock exchange

➢ To understand the FII & FDI policy in India.

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Research methodology

65

Research methodology

In order to accomplish this project successfully we will take following steps.

Data collection:

Secondary Data:

Internet, Books , newspapers, journals and books, other reports and projects, literatures

FDI:

The study is limited to a sample of investing countries e.g. Mauritius, Singapore, USA etc. and sectors

e.g. service sector, computer hardware and software, telecommunications etc. which had attracted larger

inflow of FDI from different countries.

FII:

Correlation: We have used the Correlation tool to determine whether two ranges of data move

together — that is, how the Sensex, Bankex, IT, Power and Capital Goods are related to the FII

which may be positive relation, negative relation or no relation.

We will use this model for understanding the relationship between FII and stock indices returns.

FII is taken as independent variable. Stock indices are taken as dependent variable

Hypothesis Test: If the hypothesis holds good then we can infer that FIIs have significant impact

on the Indian capital market. This will help the investors to decide on their investments in stocks

and shares. If the hypothesis is rejected, or in other words if the null hypothesis is accepted, then

FIIs will have no significant impact on the Indian bourses.

66

Conclusion

67

CONCLUSION

A large number of changes that were introduced in the country’s regulatory economic policies heralded

the liberalization era of the FDI policy regime in India and brought about a structural breakthrough in the

volume of the FDI inflows into the economy maintained a fluctuating and unsteady trend during the study

period. It might be of interest to note that more than 50% of the total FDI inflows received by India , came

from Mauritius, Singapore and the USA.

The main reason for higher levels of investment from Mauritius was that the fact that India entered into a

double taxation avoidance agreement (DTAA) with Mauritius were protected from taxation in India.

Among the different sectors, the service sector had received the larger proportion followed by computer

software and hardware sector and telecommunication sector.

According to findings and results, we have concluded that FII did have significant impact on Sensex but

there is less co-relation with Bankex and IT. One of the reasons for high degree of any linear relation can

also be due to the sample data. The data was taken on monthly basis. The data on daily basis can give

more positive results (may be). Also FII is not the only factor affecting the stock indices. There are other

major factors that influence the bourses in the stock market.

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Recommendations & suggestions

69

Recommendations & suggestions

70

Limitations of research

71

Limitations of research

72

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73

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Annexure

75